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Ireland-Portugal

1 January 2006

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Additional protocol between Ireland and Portugal signed

Ireland and Portugal signed on 11 November 2005 in Lisbon an additional protocol to the existing tax treaty of 1 June 1003..

The new protocol may have tax implications for Irish residents relocating to Portugal since it provides that individuals who change their residence and subsequently dispose of shares held in Irish companies, may nevertheless be subject to Irish capital gains tax. This is the result of several high profile cases of Irish resident individuals moving their tax residence to Portugal.

The existing tax treaty provides that the residence state retains exclusive taxing rights on gains derived from the disposal of shares by its residents provided these shares are not held in companies whose assets consist principally of immovable property located in the source state.

Firstly, the new protocol provides that, in cases where gains are not subject to tax in the residence state, a substantial shareholding may still be taxable in the individual's former residence state.

In that regard, a new Para. 6 is inserted in Art. 13. Art. 13(6) states that the exclusive taxing right of the residence state shall not affect the right of the former residence state to levy tax (for a period of 3 years after the change of residence) on capital gains derived from the disposal of shares if such gains are not subject to tax in the residence state. Accordingly, the right of the former residence state covers gains from the sale of shares in a company derived by individual who holds at any time, directly or indirectly, a minimum of 5% of the issued share capital or gains derived from a participation which value exceeds EUR 500,000.

Secondly, the protocol, in line with the 2003 OCED Model Convention, also amends the allocation of taxing rights with respect to gains derived by companies and individuals from the alienation of all or part of the shares in a company holding immovable property (Para. 2 of Art. 13). Accordingly, gains from the alienation of immovable property (taxed in the source state) will include gains from shares or comparable interests, other than shares quoted on a stock exchange, deriving more than 50% of their value directly or indirectly from immovable property situated in the source state.

Finally, the protocol clarifies that for the purposes of the non-discrimination article, the thin capitalization provisions are considered to be in conformity with the arm's length principle. It should be noted that, currently, only Portugal (but not Ireland) has domestic thin capitalization rules in place.

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